How to miss out on a good deal.
Did you realise that what you know can hurt your wallet?
In a study, 500 people (divided into two groups) were sent daily price notifications for flights from Florida to Colorado and from Colorado to Florida side by side.
For Group 1, the prices ranged from $240 - $400, with the prices going up or down by $40 in between the days.
For Group 2 the range was $140 - $500 with a difference of $96 in daily notifications.
After receiving notifications for 26 days straight, each participant was given $500 to reserve a flight in the next seven days.
But there was a catch.
They got to keep the money they saved.
And get another 10-cent bonus for every $50 saved.
On each of the remaining six days before the trip, the participants received a new offer, and it was up to them to decide whether to accept it or wait another day in the hope to get a lower price.
Now remember this:
The average price of the ticket for the 26-day period was $240. And the prices they received over the remaining six days were; $340, $320, then $260, $380, and $300.
Which group do you think saved the most?
It turns out that people in Group 1 saved the most money. Only 8% of them waited past day three compared to the 21% in Group 2.
What we saw there is called Dispersion Spillover.
What makes people miss out on a good deal?
The research showed that people are pretty good at summarising multiple numbers into ‘intuitive averages’ and when two product categories have equal price dispersion, people can form an accurate estimation of average prices and the price range.
But when two product categories have very different price variations, people overestimate the difference in the price range for the category with the smaller dispersion.
As a result, looking at a product category with large price variations makes us more likely to miss out on a good deal, continue searching for longer for a cheaper option (that most likely doesn’t exist) and even overbid in auctions.
That’s why people in Group 1, who saw a smaller price variation were more certain that they won’t get a better offer than $260 (that's pretty close to the average $240) compared to people in Group 2 who saw a much bigger price variations over the 26 days.
Dispersion Spillover has implications for how we design online retail experiences.
Price dispersions are all around us.
The prices for flights to unpopular destinations vary more than popular destinations. There’s a bigger difference in prices for red wines than white, just as prices in online stores vary a lot more than in physical stores.
What makes a price attractive is how it compares to other products present in the same space or what we remember about the prices in the category.
So, people need both price and context (Why is it high or low compared to another product?) to make smarter purchase decisions.
The researchers suggest that “consumers’ search strategies might benefit from decision aids, particularly when shopping for expensive items.”
Visual clues that provide context can reduce friction and search length by helping people make smarter purchase decisions who would otherwise misjudge the availability of cheaper offers and potentially miss out on objectively attractive offers.
💎 In case you missed…
Mastering the Art of Storytelling on YouTube. /Google
The rise of social entertainment is causing brands to shift strategies. /Glossy
Five biggest entertainment trends to know. /GWI
You’re probably greenwashing, but you don’t know it. /Forrester
Netflix struggles to hold its place in the streaming wars. /Wired
Learn something new every week.